The Bank of England's recent collateral change, announced on June 11, was the kind of technical notice that markets have learned never to skim. It was something that could reshape how SSA issuers treat the sterling market. However, whether it does will depend on what issuers and investors do next.
The change itself is straightforward. From June 19, bonds issued by regional and local governments and development or policy banks from G10 countries and Australia, rated broadly AA- or better, were accepted as Level B collateral in the Sterling Monetary Framework.
Threadneedle Street made the move as part of its shift to a repo led, demand-driven system for supplying reserves. It needs banks to hold more collateral, and so has widened what counts.
From tactical to structural
For the sterling SSA market, the impact could be significant. For years, sterling has been an opportunistic market for most issuers whereby they arrive when the cross-currency basis works. They turn up, print a short benchmark, and then leave.
Bank treasuries bought the paper when it appeared cheap enough, but with no structural reason to prefer it. The Bank's recent collateral change has altered that calculation. Paper that can be repoed is worth more to a liquidity portfolio than paper that cannot, meaning that demand that was once tactical has become structural.
Quebec was the first to test the market after the rule change took effect, and it broke two of its own records on the way. The £1bn five year was the province's largest sterling bond, and the £2.5bn order book was its biggest in the currency.
Guillaume Pichard, the province's assistant deputy minister, debt management, told GlobalCapital that Quebec did not do the trade because of the repo change, but that the new rule helped, giving the province more confidence and will help future sterling deals.
Other issuers have noticed. Land NRW is understood to be considering a sterling return in the second half, and BNG could come back for the first time since January 2025.
Not everyone in the queue has the badge. PSP Capital, the funding arm of Canada's public sector pension manager, was marketing a five year sterling benchmark on Tuesday, even though none of its bonds appear on the Bank of England's list of eligible securities. The bid appears strong enough that issuers outside the perimeter want a piece of it too.
One bid deep
But if you look at who is buying, the achievement narrows. The sterling SSA bid rests overwhelmingly on one investor type: bank treasuries.
Threadneedle Street has not broadened the sterling investor base, but has intensified demand from a buyer already there. That shows up most clearly in tenor. Nearly everything in the recent run of supply sits in the three-six year bucket because that is where liquidity portfolios live.
Nobody is printing 10 year SSA sterling paper, because the accounts that buy duration, the insurers, pension funds and asset managers who might hold SSA bonds against Gilts, are not in that trade. Pension funds repo plenty, but they repo Gilts in private markets. The collateral change makes SSA paper easier for everyone to trade, but it gives a pension fund no new reason to own it.
A market built on one bid risks faltering. A queue of Länder, Dutch agencies and Canadian provinces all targeting the same product, in the same part of the curve, through the same handful of desks, is a concentration risk.
Bank treasury demand is deep, but it is not bottomless. Treasury desks buy against limits, by name and by tenor, and once a book is full of five year Canadian paper it is full, whatever the repo eligibility.
Service the market, don't visit it
The Bank of England has done its part, and the harder part now falls to the market. Issuers who want the sterling bid to exist next year should treat the currency as a market to service rather than visit.
That means building curves and returning to tap them, the way KfW treats sterling as its third currency, rather than printing one off floaters when the basis flatters them. It means testing longer tenors and fixed rate formats, even at a concession, because that is the price of discovering whether a second buyer base exists. And it means dealers marketing the product to UK real money accounts, not just to the treasury desks that already buy it.
The test of the Bank's reform is not the size of the queue this year. It is whether, a year from now, an SSA borrower can sell a 10 year fixed rate sterling bond and find real money on the other side. The Bank of England has done what it can. Sterling will only becomes a genuine third market if it finds new buyers.